What Could, Would or Should Be Known About Term Sheets

The entire Venture investing “industry” is only about 40 years old. Over this time, perhaps more energy has been wasted on the subject of term sheets than any other activity. Here’s a view (not the view) of current best practice and a start on some standard documents. Remember that this is not legal, tax or accounting advice and that you should consult your own advisor before proposing or signing any term sheet.

For years, investors, particularly in Venture Capital, spent lots of time trying to outdo one another on TTS – Tricky Term Sheets. Everyone seemed to be looking for the perfect double-secret term sheet that would fool young companies into agreeing to a deal with a trap door in it somewhere along the line. Fortunately, in the Angel/Early Stage world, this bad behavior has largely disappeared. Today, both Early Stage investors and young companies have recognized that proposing the latest Tricky Term Sheet design is a bad use of time.

Our view of “current best practice” is shown in the attached:

  • Convertible Promissory Note – An agreement format you are free to borrow from.
  • SAFE Note – Standard agreement and some very helpful notes on variations that might be helpful.
  • Preferred Term Sheet – Several years ago, the National Venture Capital Association charged a whole gaggle of smart lawyers to come up with a Standard Term Sheet for Early Stage company fundraising.

This material was prepared by the Lateral Capital lawyers at Fredrikson & Byron in Minneapolis and presented recently to one of the Angel groups where we are members, Gopher Angels in Minneapolis/St. Paul. This is designed to be neither pro-company nor pro-investor but up the middle. As if we really needed to, we want to make the appropriate disclaimer one more time:

This document was designed to serve as a starting point only and should be tailored to meet your specific requirements. This document should not be construed as legal advice for any particular set of facts or circumstances. Note that this sample document presents an array of (often mutually exclusive) options with respect to particular deal provisions.